What Is the Occupancy Rate?

What Is the Occupancy Rate?

Let me explain what the occupancy rate really means. It's the ratio of rented or used space to the total amount of available space. You'll hear analysts talking about occupancy rates in contexts like senior housing, hospitals, bed-and-breakfasts, hotels, and rental units, among others. In a call center, for instance, the occupancy rate refers to the time agents spend on calls compared to their total working hours.

Key Takeaways

The occupancy rate measures the ratio of occupied to total usable rental space. This rate helps you understand changes in the residential and commercial real estate markets and is often used in evaluating hotel and resort properties. Occupancy rates can also apply to residential buildings, hospital beds, or even entire cities to gauge underlying economic activity and trends.

Occupancy Rates Explained

To illustrate an occupancy rate, consider an apartment building with 20 units where 18 have renters—that gives it a 90% occupancy rate. Similarly, a 200-room hotel with guests in 150 rooms has a 75% occupancy rate. On the flip side, the vacancy rate is the number of units in a building that are not rented out compared to the total number of units in the building.

Occupancy Rates and Real Estate Investors

Occupancy rates matter a lot to real estate investors because they indicate anticipated cash flows. If you're a commercial real estate investor eyeing a shopping center, you're probably not interested in one with only a 25% occupancy rate, meaning tenants are leasing just 25% of the available storefronts and restaurant space in the mall.

An investor who buys a property with a relatively low occupancy rate has to spend time and money finding additional tenants, and they risk not filling the spaces while still facing maintenance costs and property taxes. Because of this, apartment complexes, malls, and other facilities with low occupancy rates often sell for less than similar properties with high occupancy rates. In some cases, a low occupancy rate indicates something is wrong with the shopping center, such as its location or available amenities. In other cases, low occupancy rates may mean the facility is poorly managed by its existing owners or it's in an undesirable location.

Sometimes, a real estate investor will look at the occupancy rates of hotels and other facilities near a property they're considering buying. These numbers can tell you something about the financial health of the area. For example, if you're thinking about buying a restaurant, you might check the occupancy rates of nearby hotels, as those numbers affect the pool of potential diners.

An Example of Occupancy Rates: Hospitals

Hospital bed occupancy rates, as well as those for nursing homes, can be useful for examining trends in the facility's growth. To avoid overcrowding, these facilities manage their occupancy rates. They often track occupancy rates for specific departments as well, to help assess growth and demand. Governments and organizations also use aggregate numbers on hospital occupancy levels to make plans regarding public health initiatives.